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Military Pensions: The Truth Behind This Government Panel's Latest Reform Proposal

By Dan Caplinger - Jan 31, 2015 at 5:40AM

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The government is looking at measures to keep military benefits in check. What it really means to members of the Armed Forces.

Source: U.S. Department of Defense.

For years, traditional pension plans have become increasingly rare, with private-sector employers scrapping them in favor of 401(k) plans and other pension alternatives that limit the amount of financial responsibility they have to ensure that their employees get the payments they've earned during their careers. By comparison, pension plans have remained relatively strong in the public sector. But now, America's military members could face the same changes that workers in the private sector have had to endure.

A new proposal from the independent Military Compensation and Retirement Modernization will dramatically change how military members earn pension benefits. Although the proposal comes with promises that it will benefit many members of the military, private-sector employees can attest to the mixed impact that similar moves have had on their retirement prospects in the past. Let's take a closer look at what members of the Armed Forces get in retirement benefits now and compare them to what will be available under the new system.

How military pensions work now 

Currently, servicemembers who remain on active duty or who serve in the Reserves or the Guard for a required period of time, which is usually 20 years, can receive retired pay. The exact formula for determining how much you receive in benefits depends on when you entered service, but the general idea is that your monthly payment is based on how much you got paid during certain points in your service career and how long you served. As an example, many servicemembers who serve in active duty for 20 years get 50% of their base pay, with an additional 2.5 percentage points for every year after that.

Source: U.S. Department of Defense.

The most distinctive feature of the military pension, though, is when you receive it. Most pensions that private employers offer don't kick in until you reach retirement age, so if you decide to retire early, you have to wait before getting benefits. With military pensions, you can start getting monthly payments as soon as you leave service.

As you'd imagine, the prospect of paying pension benefits for decades is a source of financial worry for the Pentagon. That's part of the reason why the government created the independent panel to assess military benefits and look for ways to control costs in light of broader defense budget cuts.

What the proposal would mean for military members

The new proposal, which would take effect only for new servicemembers, would make two major changes. First, it would make changes to existing pensions that would defer payouts until reaching a standard retirement age, even for those who served long enough to reach full eligibility. Also, to help make up for those lost benefits, servicemembers would get contributions through the Thrift Savings Plan, the federal retirement program that acts like a 401(k) plan for other federal workers.

Proponents of the measure argue that for those servicemembers who don't make the military their long-term career, the new proposal would actually lead to greater retirement benefits. Meanwhile, with the cost of paying servicemembers having grown by nearly half over the past 15 years, Pentagon officials have faced increasingly difficult challenges in prioritizing how to spend a smaller pool of remaining money while meeting all of their objectives. Anything that reins in benefits could free up more money for other military programs.

DoD photo by Master Sgt. Ken Hammond, U.S. Air Force.

Yet many policymakers will oppose the proposal, pointing to the substantial reduction in financial incentives to ensure that enough prospective volunteers are willing to become career military members. Given that servicemembers in many specialties already have huge financial incentives to leave the military and join private industry, taking away the most distinctive financial feature of military service would make it even harder to keep well-trained personnel within the Armed Forces.

No easy solution

Even more troubling is that because of shifting demographics and the 20-year service requirement, the total amount that the government pays to retired military servicemembers could easily exceed the amount it pays to current active-duty personnel in the near future. Private businesses that have faced that situation have often made dramatic financial moves to remedy a situation they saw as untenable, and in some cases, current retirees have made huge sacrifices in order to try to sustain pension systems both for them and for current workers.

Nevertheless, most political analysts expect the proposal to go nowhere, as partisan fighting between Congress and the Administration could leave military pension reform at a stalemate. That might be good news for those who intend to stick with the military for the long run, but it's uncertain whether the burden it puts on the Pentagon budget will end up causing even greater damage in the future.

Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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